Credit Suisse downgraded Dell Inc to neutral raising concerns over the company's acquisition strategy, and recommended investors take profits from Dell stock but add positions in Hewlett-Packard Co, Apple Inc and EMC Corp.
The brokerage upgraded No.1 PC maker Hewlett-Packard to outperform from neutral, saying the stock has further room for upside even after its sharp recovery from March lows.
We believe the cyclical pressures in printing are widely understood by investors and we are now past the cyclical bottom in this division, the brokerage said in a note.
With increasingly positive demand trends in enterprise hardware and PCs, earnings momentum in fiscal 2010 will be greater than previously forecast, Credit Suisse said and raised its target on Hewlett-Packard stock to $55 from $44.
While we remain confident that the PC industry will benefit from a corporate refresh cycle in 2010, our concerns over Dell's acquisition strategy now hamper the investment thesis, the brokerage said.
Dell plans to buy Perot Systems Corp for about $3.9 billion, paying a steep 67.5 percent premium to expand its technology services business and compete with IBM and Hewlett-Packard.
Dell has made it clear that it will continue to acquire for growth, and the company's hefty valuation of Perot's assets suggests Dell's uses of cash could be riskier than we previously imagined, the brokerage wrote.
Perot Systems, a computer services provider founded in 1988 by former U.S. presidential candidate Ross Perot, would be the largest ever acquisition by Dell and comes after extended speculation about its M&A strategy.
The Perot integration will represent a trial by fire for Dell, and as such, investors will increasingly focus on the risks involved, Credit Suisse said.
The potential risks related to Perot integration include key employee attrition, underestimating large transaction costs, and unintended conflicts with Dell's current partner base, the brokerage said.
Credit Suisse cut its price target on Dell shares to $16 from $19.
Shares of Hewlett-Packard were up 2 percent in pre-market trade. They closed at $46.35 Monday on the New York Stock Exchange, while those of Dell closed at $16.01 on Nasdaq. (Reporting by Sakshi A Mattoo in Bangalore; Editing by Gopakumar Warrier)